Economics - Apr 7

Theory of oil-shock recessionEd Crooks, Financial Times Ed Crooks, energy editor, examined the controversial idea put forward by Professor James Hamilton of the University of California, San Diego, that the US recession was caused by the oil shock of 2007-08.

Prof Hamilton says it is "a conclusion that I don't fully believe myself".

But his work ( http://bit.ly/EG3pj) raises the important question of whether the role of oil in the US and global downturn has been underestimated.

It also deals a blow to the comforting idea, promulgated by the International Monetary Fund among others, that the demand-led oil price rise of the 2000s would be more economically benign than the supply-led shocks of 1973 and 1979.

Of course, there were many other problems in the US economy last year - not least the housing crash. But house prices started to fall in 2006 and the economy continued to grow. In Prof Hamilton's model, if the oil price was taken out of the equation, the economy would have grown throughout last year. (6 April 2009)

Borrowing from a Depression-era idea, they are aiming to help consumers make ends meet and support struggling local businesses.

The systems generally work like this: Businesses and individuals form a network to print currency. Shoppers buy it at a discount — say, 95 cents for $1 value — and spend the full value at stores that accept the currency.

Workers with dwindling wages are paying for groceries, yoga classes and fuel with Detroit Cheers, Ithaca Hours in New York, Plenty in North Carolina or BerkShares in Massachusetts.

Ed Collom, a University of Southern Maine sociologist who has studied local currencies, says they encourage people to buy locally. Merchants, hurting because customers have cut back on spending, benefit as consumers spend the local cash.

... During the Depression, local governments, businesses and individuals issued currency, known as scrip, to keep commerce flowing when bank closings led to a cash shortage. (6 April 2009)

Chris Cook: Banking on EnergyChris Cook, The Oil DrumThis is a guest post by Chris Cook. Chris is Former Director of the International Petroleum Exchange, and is now a Strategic Market Consultant and commentator. The post was written prior to the G20 meeting which started April 2. In this post, Chris proposes that international trade be denominated not in dollars, but energy. - TOD editor Gail Tverberg

In the approach to the G20 meeting we saw two distinct threads of global policy emerging: one by the global debtor nations, led by the US, and another by global creditor nations, led by China.

In the US, we see Treasury Secretary Geithner's trillion dollar quantitative easing of the rich, which cannot work for two reasons.

Firstly, the problem is not a shortage of credit, but a shortage of the creditworthy. As asset prices and incomes continue to collapse, only the top few percent are now in a position to borrow, based upon the wealth which has become increasingly concentrated in their hands in the last 20 years of debt-disguised recession. The only solutions for the US are therefore fiscal.

Secondly, this initiative is based upon the premise that the creditors of the US will support these measures by continuing to buy assets denominated in an increasingly debased currency.

China's increasing impatience with the dollar as a global reserve currency is now quite overt and specific. (5 April 2009)

Oil As Money and the Decline of Energy EarningsGregor Macdonald, Seeking Alpha The Oil Drum posted a must read essay yesterday by Chris Cook, formerly of the International Petroleum Exchange. Cook suggests that the only real money is in fact energy. And, that the world should eventually migrate to a monetary system based on that reality.

Whether one agrees, disagrees, or simply needs more time to digest such an idea, let’s contemplate the 10 Year chart of the Dow Jones Industrial Average in terms of the price of Oil (click to enlarge). (6 April 2009)

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